Canada’s population continues to age, and the number of retirees grows annually, so it may finally be time for the government to consider some simple tax system reforms as they relate to encouraging, and prolonging, Canadians’ retirement savings.
A couple of reports on our retirement system were released in June, along with various suggestions for reform. Let’s review some of the highlights of each report, as well as their top recommendations.
The first report, which was tabled in the House of Commons last month, was the result of a government study on registered retirement income funds (RRIFs). The study was in response to Private Member’s Motion M-45, introduced by Liberal MP Kirsty Duncan (Etobicoke North), and adopted by the House of Commons in June 2022.
Duncan’s motion recognized that seniors “deserve a dignified retirement free from financial worry,” that many seniors are worried about their retirement savings running out and that many seniors are concerned about being able to live independently in their own homes.
The study focused on RRIFs, and looked at the conversion age, the current minimum withdrawal rates and whether the underlying assumptions regarding rates of return, inflation and longevity continue to be appropriate.
A RRIF is the most common successor of a registered retirement savings plan (RRSP), the other being the purchase of a registered annuity. A RRIF allows you to keep the same investments as you had in your RRSP and continue to defer taxes on the invested funds, with the notable exception that you must withdraw at least a required minimum amount annually, starting in the year after you set up the RRIF.
The requirement to withdraw a minimum annual amount, whether you need it or not, is of primary concern for many seniors. The amount is based on a percentage factor, often referred to as the “RRIF factor,” multiplied by the fair market value of your RRIF assets on Jan. 1 each year.
For example, if you converted your RRSP to a RRIF in 2022 when you turned 71, and the balance of your RRIF was $100,000 on Jan. 1, 2023, then you must withdraw 5.28 per cent, or $5,280, this year. The RRIF factor increases each year until age 95, when the percentage is capped at 20 per cent annually thereafter.
The report indicated many seniors feel that RRIF minimum withdrawals, and their interaction with other income-tested government benefits such as the Guaranteed Income Supplement, limit their ability to optimize their financial planning through their retirement years.
Demographic changes, including longer life spans and longer careers, and economic factors that have reduced seniors’ expected rate of return on their investments, support changes to the RRIF conversion age and RRIF minimum withdrawal factors.
As part of the study, the Department of Finance conducted “targeted outreach” to various experts in seniors’ issues and retirement savings. It also received and considered submissions from several interested parties.
Among the more novel suggestions for RRIF reform is one by Amin Mawani, an accounting professor at the Schulich School of Business who specializes in tax policy. He suggested permanently exempting retirees with RRIF balances of less than $150,000 from minimum RRIF withdrawals. This would allow seniors with relatively modest retirement savings to preserve those savings in a tax-deferred environment until they were actually needed in retirement.
The Conference for Advanced Life Underwriting had a slightly different proposal, advocating that all RRIF holders be allowed to exclude up to $160,000 (indexed to inflation annually) from the application of the RRIF minimum payment formula until the RRIF holder turns 85.
The Expert Panel on Income Security recommended allowing the portion of any RRIF withdrawal in excess of the annual minimum required distribution be carried forward for income tax purposes to allow individuals to manage the consequences of a lump-sum withdrawal for unexpected expenses.
To illustrate, let’s say our senior in the example above actually withdrew $10,000 from her RRIF this year to pay for some dental surgery that wasn’t covered by her insurance plan. Her minimum 2023 withdrawal, based on her age, was only $5,280. Under this proposal, her excess withdrawal of $4,720 could be carried forward and used to reduce the amount she will be required to withdraw in 2024 (or future years, as applicable).
The government also received several recommendations that the age in which an RRSP must be converted to a RRIF (or registered annuity) be deferred, either immediately or gradually over time, to 75 (versus the current 71), and that RRSP contributions be permitted to continue to that age.
Another report released last month on retirement income was Strengthening Retirement Income Security: Fairer Tax Rules and More Options Needed by the C.D. Howe Institute. Co-authors Alexandre Laurin of the institute and George Turpie of Canada Life Assurance Co. said that “simple changes to tax rules can improve retirement security for Canadians, as well as make the retirement system more equitable among different classes of savers, and more efficient at managing longevity risks for capital decumulation.”
One of the report’s key recommendations is to increase permitted retirement savings contribution limits, potentially by eliminating the annual income-based tax limits and replacing them with a uniform inflation-indexed lifetime accumulation limit.
The authors also floated the idea of introducing a tax-free pension account (TFPA) that would primarily cater to the requirements of low- to mid-income earners. Similar to the tax-free savings account (TFSA), a TFPA would enable tax-free accumulation and withdrawals, but, due to its pension nature, it would be wholly distinct from, and complement, TFSAs.
For the decumulation phase, the authors’ major recommendations include: adding annuities to the list of investment products that can be held within a TFSA, extending the age limits for when individuals must stop contributing to, or begin withdrawing from, their registered plans and, of course, changing the mandatory minimum withdrawals from registered savings, something the Institute has long trumpeted.